Purchasing agencies play a bigger role in luxury market

Deng Li, a graduate student in the United States, runs an online shop as an agent selling luxury goods she buys from abroad.

"Since there are three holiday breaks a year in my college, I can take the opportunity to purchase dozens of luxury items and sell them to domestic customers," said the 22-year-old Beijinger, who has been studying in the US for four years.

Deng is not unique. Purchasing agencies became an emerging business for foreign luxury brands with transaction volumes hitting 12 billion yuan (US$1.89 billion) in 2010, excluding items bought for friends and relatives, according to a report by China E-commerce Research Center.

Deng charges 3 to 5 percent of the price as commission for each item. She puts photos of the latest items online for each season. Her online shop has seen a surge in orders for luxury goods in the past two years.

In 2009, Deng found a business partner, a Chinese-British whom she uses on business trips to Paris.

"The purchased brands are mainly British and French, as he is often commuting between London and Paris," Deng said, adding that a limited number of US and Italian brands were also among the targets.

According to industry insiders, the boom the business is enjoying is mainly driven by the large price gap of the items between the Chinese and overseas markets.

"The gap ranges from hundreds of yuan to thousands of yuan," Deng said, adding, "For some items, the gap is as much as 10,000 yuan to 20,000 yuan."

According to the Ministry of Commerce, for 20 luxury brands ranging from watches to wines, the prices on the Chinese mainland are 45 percent higher than in Hong Kong, 51 percent higher than in the US and 72 percent higher than in France.

High taxes imposed on imported luxury goods are the main culprit behind the high prices.

For luxury goods, 6.5 percent to 18 percent goes to the tariff, 17 percent is levied for value-added tax, and 30 percent goes on consumption tax.

Ouyang Kun, chief of the World Luxury Association's China office, said many countries don't impose tax on luxury goods so the prices there are low.

"China levies higher taxes on those goods," said Ouyang, indicating that some types of taxes overlap.

A report on the luxury goods market in China released by Bain & Co showed that luxury suppliers earned 68.4 billion yuan from Chinese consumers last year, with combined spending on cosmetics, perfume and healthcare products totaling 16.9 billion yuan, followed by 15.5 billion yuan on watches.

Another report released by the Research Center for Luxury Goods and Services at the University of International Business and Economics (UIBE) last month showed that only one third of the purchases took place on the Chinese mainland.

The developed markets saw 58 percent of the transactions in Europe, compared with 28 percent in the US and 8 percent in Japan, the report added.

It is estimated that overseas purchasing agencies and consumption caused a loss of 2 billion yuan a year in taxes for China's fiscal revenue, a sum that has forced the government to mull an adjustment in the taxing of luxury goods due in the burgeoning market for such products.

Yao Jian, former spokesman for the Ministry of Commerce, said in June that China would lower tariffs for imported luxury goods but did not disclose by how much.

The Bain & Co report also estimated that the Chinese market for luxury goods would grow at a pace of 20 percent to 35 percent annually over the next five years.

The Ministry of Commerce predicted that China would become the largest luxury goods market by 2014, accounting for 23 percent of the global market.

The UIBE report also pointed to the potential for growth in markets in second- and third-tier cities.

It said that sales of luxury goods in Hangzhou, Shenyang, Chengdu and Qingdao would account for 8 percent, 6 percent, 5 percent and 3 percent of the country's total, with these cities being the main markets for competition between luxury brands.

"Markets in first-tier cities such as Beijing, Shanghai and Guangzhou are highly mature," said the report.

But it said for the lower-tier cities, the limited marketing and promotional activities and sales channels would challenge the expansion of luxury brands. However, e-commerce services selling the brands would make up the gap.